Wednesday, March 28, 2007

If the price of oil goes up much more, the Dow and other US equity indices will readily slide down that slippery slope. The traders know this, investors know this, even the oil executives know this is true and that's the #1 reason the price of oil isn't going to go through the roof.

Oil executives are not fools. They realize that in a slowing economy, they can't be out there greasing the skids with higher fuel costs (well, not too high, anyway), because there's a breaking point and we're getting pretty close to it. The big oil companies charge higher than market prices because they can. Congress and our lax regulatory agencies allow them to effectively rig prices so as to effectively maximize profits. They are not, however, the only corporations with skin in the game. After a while, some of their corporate brethren might want a piece of the greed gravy train as well. If the oil companies siphon off all of the disposable income in the economy, there's little to nothing left for the Wal-Marts, Citigroups and Microsofts of the world because the Exxon-Mobils are taking more then their fair share.

Big oil has been getting fat at the public trough for a long time, but they've really beefed up recently. And they've done so at considerable expense to everyday consumers, governmental bodies and other corporations. It's time for the oil companies to make a little less money and act a little more like responsible corporate citizens for a change (I know, it's very wishful thinking.).

The handwriting is on the wall, and has been for some time. The US economy would be in much better shape if people were spending 20% less for fuel (and not just gas, but home heating oil and natural gas, too) than they are now. The oil companies in the US are an effective monopoly or cartel and Congress should have taken action long ago to curtail their illegal price-fixing operations. Big oil can profess all they like that the refineries aren't operating at full capacity or that they have no control over the price of oil. Unfortunately for them, nobody's buying that argument any more, but it's going to take a pretty big scare on Wall Street for them to mend their ways, and that scare has begun.

Today's trading was more of what we've become accustomed to over the past six weeks: sluggish and lower, pessimism abounding, plenty of rational reasons. The elephant in the room still remains big oil. They're a drag, both in real terms and euphemistically. High fuel prices are getting old and stocks are taking a beating on it. Wealth is not very evenly distributed and there's little new money coming into the markets. Big oil is sucking the life out of the economy.

Whether the oil execs are smart enough, visionary enough, to understand how they'll be damaged in an outright recession remains to be seen. Keep an eye peeled on oil prices, which shot up another $1.15 to $64.08 today. That's now about $6-8 per barrel higher than the economy can handle. Forget about a crash in housing prices. That's a fait accompli. $3.00 per gallon gas will just be more fuel on the fire and will, without a doubt, drag the nation into a recession. While it may already be too late, some relief at the pump would be more than just welcome, it may be necessary.

After Monday's negligible trade, Tuesday and Wednesday have cost the Dow and the other indices anywhere from 1 to 1.5% for the week. After rocketing up 370 points last week, the Dow's given back more than half, 180 points, this week, but still 225 points ahead of the March 13 low point of 12,075.96. There's little doubt that number will be tested again, and soon. First quarter earnings are due to make their way to the street in a week's time, and the trickle down could easily turn into a deluge. Corporate profits have been solid, maybe too good, because companies have some tough numbers to exceed from a year ago. Many will not make the grade.

Wednesday's market internals were nearly a carbon copy of Tuesday's. declining issues were ahead of advancing ones nearly 2-1, with 207 new highs versus 91 new lows. Pessimism is spreading, however, as down volume was 3 times up volume. Traders are getting very picky and that's not generally a sign of a healthy market. The remainder of the week could turn out to be very discouraging indeed.

Today's economic events - a 2.5% rise in durable goods orders and a slackening of crude inventories were just enough to keep buyers on the sidelines. Tomorrow, the government finalizes 4Q '06 GDP, and the tepid pace of 2.2%, if confirmed, will only serve to dampen attitudes. Initial claims may have some effect, but only if it's very much a negative. Friday's miasma of reports, from Personal Income to the Chicago Purchase Manager's Index, may just tip the markets over the edge.

Of course, much more of the now non-stop nonsense emanating from our nation's capitol may prove to be the unseen straw that breaks the camels back. We have a dysfunctional executive branch being hounded by an impatient Congress, all of it heading for a nasty cataclysm. There are a lot of angry, bitter, upset people out there who are certainly not in any kind of mood for any more distasteful news. The American people are fed up and the discontent is growing.